Tax Experts react to Anti-profiteering Rules as approved by GST Council

The Anti-profiteering Rules released by Govt. last week have only added to India Inc’s worries, leading to an apprehension if the same would lead to witch-hunting by the Taxmen. While the intent is to curtail inflation post GST implementation, we can just hope that the provision prescribing deregistration would be used sparingly.
Tax Experts react to Anti-profiteering Rules as approved by GST Council

Comments

Many countries around the world have attempted to introduce strong anti-profiteering measures during their GST implementation phase. Anti-profiteering measures certainly act as a check on business organizations, which are reluctant to pass on the benefit of GST to the end consumer, leading to temporary inflation in the prices in the short run.

The Anti-Profiteering Rules announced by the government, certainly brings in some clarity regarding how the government will perceive ‘what shall be construed as profiteering’ and ‘what shall not be construed as profiteering’? However, unlike other countries which have introduced anti-profiteering measures in the past, the Indian anti-profiteering rule does not propose any ‘Ad-hoc formula’ or set ‘mechanism’ to ascertain unreasonable or high profit. Rather it proposes a subjective ‘case to case’ scrutiny of selected applications, which shall be conducted by the National Anti-profiteering Authority with the help of Director General of Safeguards.

Such subjective scrutiny of profiteering cases clearly manifests Governments intent, that it is not interested in going behind every business organization that may have appropriated their prices in response to GST. Rather the objective seems to be to ‘selectively identify cases’ that seem to be grossly non-compliant with the anti-profiteering clause provided under the GST Legislation.

Furthermore, while the rule mentions that that Anti-Profiteering Authority to issue order within 3 months of receipt of report from Director General (Safeguards), the overall activity may probably take 8-10 months for a selected anti-profiteering case to reach its conclusion. As a whole it appears that these rules will empower the government to take strict actions against defaulters who are convicted by the Authority, but the ‘case to case’ approach of scrutinizing cases will certainly limit its wider reach of controlling inflationary pressure on prices in the short run.

The concept of ‘separation of powers’ between executive (i.e. the bureaucracy) and the legislature is a ‘basic structure’ of the Indian Constitution. Extrapolating that in the context of anti-profiteering, it is the legislature which has to specify the guidelines to determine ‘profiteering’, to determine as to how much reduction in price will meet the test of “commensurate reduction” as under the CGST Act – especially since there are stringent penalties being envisaged in the Anti-Profiteering Rules extending upto cancellation of registration (as per Rule 8(3)(d) of the Anti-profiteering Rules) in cases of ‘profiteering’. Unfortunately, not only the legislation but even the Anti-profiteering Rules fail to provide any guidance on ‘profiteering’ – so, it will ultimately be left to the sole discretion of the bureaucrats appointed to the ‘Screening Committees’ (at State-level), ‘Standing Committee’ and the ‘National Anti-Profiteering authority’ to decide what is “commensurate reduction” as under the CGST Act and whether in a particular case, an assessee has to be penalized for profiteering (including cancellation of his registration). This is a textbook case of abdication of essential legislative function. The whole anti-profiteering legal framework in India is thus vulnerable to a challenge on the ground of Constitutional invalidity on account of ‘excessive delegation’ by the Parliament.

Further, the Anti-profiteering Rules mention section 164 read with section 171 of the CGST Act as their legal basis – Section 171 is the generic statutory provision in the CGST Act to deal with anti-profiteering and Section 164 is the general Rule making power of the Government; neither provision envisages levy of any penalty whatsoever. However, it is a settled position of law that power to levy penalty has to be specified by the legislation itself in precise detail and cannot be left to the bureaucracy to capture through Rules/Notifications etc. Any penal action against a tax payer solely on the basis of the Anti-profiteering Rules would also be exposed to be struck down on the ground of Constitutional invalidity on account of ‘excessive delegation’ by the Parliament.

It is expected that the weapon of anti-profiteering would be used in the right way and the government is taking appropriate measures for this to happen. Let's understand from a small example of insurance services. While the tax rates on services increase in the GST regime, the market forces will control the prices including those of insurance policies. It is expected that the premiums should not increase in spite of the increase in tax rates as the credit pool of insurance companies will increase. The insurance companies are mindful of the anti-profiteering provisions which can be initiated against the increase in premium. Further, even the Authority for anti-profiteering can identify persons who do not pass on the benefit. Anti-profiteering rules and the formation of the National anti-profiteering authority will ensure that the inflationary pressure is curtailed.

Will the procedure set out in the Anti-Profiteering Rules, 2017 serve its objective, act as a deterrent against price rise following GST implementation? Answer, clearly is yes, it will. But, will it be as effective as it is expected to be and will it impact businesses and ease of doing business? While all appreciate that the major tax reform like this should bring in its desired effect for consumers to see and feel, and, consequent message to the businesses that “mind you, do pass on the tax gains to consumers else, you will have severe punishment”.

But, then, what about additional costs that the businesses will incur especially, funding and compliance costs? And, as some businesses are asking, what about additional tax cost that we are suffering because of inadequate transition provisions? Should there be compensation from the amount of unjust profits that go to the Consumer Welfare Fund?

Proceedings for determining whether a business has profited from change in tax regime will take fairly long – and, even 8-10 months, is long from this perspective. In most cases, by this time, except in exceptional cases of few identifiable buyers, it will be difficult to identify eligible persons to whom refund is to be made and the amount will end up being deposited in the Consumer Welfare Fund!

Few Immediate questions that come to mind and, appropriate response to which could perhaps, ease the pain of these proceedings and their consequences include:

• Should there be time limit say, 6 to 9 months from the date of introduction of GST, within which complaints relating to possible profiteering must be filed?

• Should there be a provision, where the parties, the supplier, the complainant and the authorities have a dialogue and agree to measures – say, within 15 daysof filing of application to ensure speedy action – without getting into detailed investigation - a negotiated settlement?

• What period would the authorities consider for determining possible profiteering – price on the date of implementation of GST/3 months prior to GST implementation or any other date?

• How will the “commensurate reduction in price” be determined – will it be just a mathematical exercise of comparing the tax rate and input tax credit or other aspects will also be considered?

• If complaint is received against a supplier, will the authorities examine only that supplier’s case or will they examine the entire supply chain?

• Will there be monitoring of prices post order for reduction in price?

• How to ensure transparency of entire process? Should there be public hearings?

• Who will bear the cost of litigation in case the complaint is found to be frivolous? What deterrent will be in place to ensure that this measure is not used for harassment?

• If price reduction or refund is ordered, will there be penalty too! That would be too harsh.

Efficient and transparent handling of the processes and learning from, good and not so good, experiences of other countries will be the key guide in making this also a successful exercise.